Income Tax Appellate Tribunal - Hyderabad
G. Indira Krishna Reddy, Hyderabad vs Dy.Cit., Circle-2(2),, Hyderabad on 24 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" , HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER
I.T.A. Nos. 1495, 1496 & 1497/HYD/2014
Assessment Years: 2007-08, 2008-09 & 2009-10
G. Indira Krishna Reddy, Dy. Commissioner of
Hyderabad. Vs Income-tax, Circle - 2(2),
Hyderabad.
PAN - ACGPG 1935 J
(Appellant) (Respondent)
I.T.A. Nos. 1498, 1499 & 1500/HYD/2014
Assessment Years: 2007-08, 2008-09 & 2009-10
G.V. Krishna Reddy, Hyderabad. Dy. Commissioner of
Vs Income-tax, Circle - 2(2),
PAN - ACGPG 1923N Hyderabad.
(Appellant) (Respondent)
For Assessee : Shri Raghunathan S
For Revenue : Smt. U. Minichandran
Date of Hearing : 16-05-2017
Date of Pronouncement : 24-05-2017
O RDE R
PER D.S. SUNDER SINGH, A.M.:
All these appeals filed by two different assessees (both are husband and wife) are directed against orders of CIT(A) - III, Hyderabad, all dated, 30 th July, 2014 for the AYs 2007-08 to 2009-10. As identical issues are involved in these appeals, they were clubbed and heard together and, therefore, we find it convenient to dispose of these appeals by a consolidated order.
:- 2 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
2. As facts and grounds are materially identical in all these appeals, we refer to the facts in AY 2007-08 in case of Indira Krishna Reddy, to dispose of these appeals.
3. Briefly the facts of the case are that the assessee filed her return of income for the AY 2007-08 on 31/07/2007 admitting total income of Rs. 2,69,91,657/- besides agricultural income of Rs. 3,00,000/- and summery assessment u/s 143(1) was completed on 05/08/2008. After recording the reasons the case was reopened by issuing notice u/s 148 of the Act on 30/03/2013. Subsequently, notices u/s 143(2) and 142(1) dated 24/05/2013 were issued along with show cause to assess deemed dividend u/s 2(22)(e) in the hands of the assessee. The AR of the assessee filed reply dated 21/06/2014 on 24/06/2013.
3.1 The assessee Smt.G. Indira Krishna Reddy is having share holder in the company M/s Caspian Capital and Finance Pvt. Ltd., more than 10% and also share holder in the companies M/s. Metro Architectures & Contractors Pvt. Ltd and M/s Orbit Travels & Tours Pvt. Ltd having share holding of 20% and 40% respectively. As on 31.03.06, M/s. Metro Architectures & Contractors Pvt. Ltd., has authorized capital of Rs. 20,00,000/- issued capital of Rs. 1,00,000/- and share application money pending for allotment Rs. 7,17,80,000/-. Similarly, M/s. Orbit Travels & Tours Pvt. Ltd., also as on 31.03.2006 has authorized capital of Rs. 10,00,000/- issued capital of Rs.6,00,000/-. In spite of such huge amount of share application money pending for allotment and very less scope for issued capital in the case of second mentioned company, again M/s Caspian Capital and Finance Pvt. Ltd., (formerly known as GVK Capital & Finance Ltd.,) advanced an amount of Rs.36.10 lakhs and 15.00 lakhs during the year in the guise of share application money to M/s. Metro Architecture & Contractors Pvt Ltd and Orbit Travels & Tours Pvt Ltd., respectively.
:- 3 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
3.2. During the assessment proceedings the assessee filed reply to the show cause/ objections in various dates. The same were summarized in the assessment order, as under.
1. All the material facts were available with assessing officer in relation to the share application money and investment details during the original assessment.
2. Legitimate Business Transactions cannot be re-characterized.
3. There is no requirement under any law to have adequate authorized capital at the time of receiving share application money.
4. Deeming provisions should be interpreted strictly.
5. The Hon'ble Delhi High Court in the case of Sunil Chopra (201 Taxman 316) cannot be relied upon.
6. Deemed dividend to be taxed in the hands of the recipient company and not in the hands of the share holder. Deemed dividend would arise only in the event of parting of the funds by the company in favor of the share holder."
3.3 The assessee stated that details of investments along with shares held in all the companies were submitted during the original assessment proceedings. Further, stated that during the course of assessment of M/s Caspian Capital, the company had submitted share application money paid to recipient company along with details of share holders. Thus the AO had all the material and he has of the view that section 2(22)(e) did not get attracted in this case. Further, she stated that subsequent Assessment Years i.e., 2007-08 to 2009-10, there is no change in the facts, following the rule of consistency, a different view could not be taken and relied in some case laws.
3.4 After considering the submissions of the assessee and referring to the provisions of section 2(22)(e) of the Act as well as examining the issue with various case law, the AO observed as under:
:- 4 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
10.4. In the instant case, the assessee Smt.G. Indira Krishna Reddy is having share holder in the company M/s Caspian Capital and Finance Pvt. Ltd., more than 10% and also share holder in the companies M/s. Metro Architectures & Contractors Pvt Ltd and M/s Orbit Travels & Tours Pvt Ltd having share holding of 20% and 40% respectively. As on 31.03.06, Metro Architectures & Contractors Pvt Ltd., has authorised capital of Rs. 20,00,000/- issued capital of Rs.1,00,000/- and share application money pending for allotment Rs.7,17,80,000/-. Similarly, M/s. Orbit Travels & Tours Pvt Ltd., also as on 31.03.2006 has authorised capital of Rs. 10,00,000/- issued capital of Rs.6,00,000/-. In spite of such huge amount of share application money pending for allotment and very less scope for issued capital in the case of second mentioned company, again M/s Caspian Capital and Finance Pvt. Ltd., (formerly known as GVK Capital & Finance Ltd.,) advanced an amount of Rs.36.10 lakhs and 15.00 lakhs during the year in the guise of share application money to M/s. Metro Architecture & Contractors Pvt Ltd and Orbit Travels & Tours Pvt Ltd., respectively. Th payer company is also having accumulated profits an amount of Rs. 4,01,18,158/-
10.5. The fact that the authorized capital of the above mentioned company substantially low when compared to the share application money received by it coupled with the fact that the shares are yet to be allotted proves that the amount advanced by M/ s. Caspian Capital and Finance P Ltd though termed as share application money, is in fact in the nature of unsecured loan. Consequently, the amount advanced by M/s Caspian Capital and Finance P Ltd. to M/s. Metro Architectures & Contractors Pvt Ltd and M/s Orbit Travels & Tours Pvt Ltd is assessable as deemed dividend in the hands of Smt. Indira Krishna Reddy for the A.Y 2007-08 in accordance with the provisions of section 2(22)(e) of the Act. Therefore, an amount of Rs 51,10,000/- added to the returned income of the assessee."
4. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and contended that the company M/s Caspian Capital and Finance Pvt. Ltd. is an investment holding company and is in the business of investing shares of authorized group companies and further stated that the said transaction was a purely commercial and legitimate business transaction.
4.1 The AR of the assessee stated that the AO considered the entire share application money as deemed dividend u/s 2(22)(e) in the hands :- 5 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy of the assessee as well as in the hands of the assessee's husband which would lead to double taxation. He further stated that it should be restricted to the extent of assessee's share holding in the recipient companies.
5. After considering the submissions of the assessee, the CIT(A) observed that the company M/s Caspian Capital and Finance Pvt. Ltd. has advanced loan in the guise of share application money. Therefore, the question of interpretation of deeming fiction u/s 2(22)(e) directly does not arise. Merely, because making entry in the books does not change its true character of transaction. The way in which entries are made by an assessee in his books of account is not determinative. What is necessary to be considered the is the true nature of the transaction. For this proposition, the CIT(A) relied on the decision in the case of Sutlej Cotton Mills Ltd., Vs. CIT (SC) 116 ITR 1.
5.1 The CIT(A) directed the AO to apportion the entire advanced amount in the hands of Shri G.V. Krishna Reddy and his spouse Mrs. Indira Krishna Reddy as per the share holding pattern of Shi GV Krishna Reddy and Mrs. Indira Krishna Reddy in the payer company i.e. Caspian Capital (Pvt.) Ltd. However, such an apportionment is subject to that if it was taxed in both the hands i.e. assessee and her husband, the apportionment is to be done. In case there was no such taxation in both the hands, the question of apportionment of the same does not obviously arise.
6. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal, which are common in all the appeals, except the difference in quantum of additions:
1. The Order of the Commissioner of Income-tax (Appeals)-III, Hyderabad dated 30-072014 is erroneous, contrary to law and facts of the case.
:- 6 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
2. a) The Commissioner of Income Tax (Appeals) erred in confirming addition of Rs.25,55,000/- out of Rs.51,1 0,000/- made u/s.2(22)(e) by the Assessing Officer stating that the Assessing Officer is justified in considering share application money made by the Caspian Capital and Finance Pvt Ltd with companies (i) Metro Architects & Contractors Pvt Ltd and (ii) Orbit Travel & Tours Pvt Ltd as deemed dividend u/s.2(22)(e).
b) The Commissioner of Income Tax (Appeals) ought to have seen that the appellant did not receive any payment from Caspian Capital and Finance Pvt Ltd and therefore erred in confirming the addition made u/s.2(22)(e) as deemed dividend.
3) For all of the above and such other grounds as may be urged at the time of hearing it is most respectfully prayed that the Hon'ble Tribunal may kindly direct the Assessing Officer to delete the addition of Rs.25,55,000/- sustained by the Commissioner of Income Tax out of Rs.51,10,000/- made by the Assessing Officer as deemed dividend u/s.2(22)(e) in the interest of justice.
6.1 The assessee has raised the following additional grounds of appeal:
4. That on the facts and in the circumstance of the case and in law, the Ld. CIT(A) has erred in upholding that the action of Ld. AO in not considering/following the CBDT Circular No 495 of 1987 dated 22 September 1987 which was binding on the Ld. AO.
5. Without prejudice to grounds 1 to 4 above, that on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not restricting the addition under section 2(22)(e) of the Income tax Act, 1961 proportionate to the extent of Appellant's shareholding in each of Metro Architectures & Contractors Private Limited and Orbit Travels & Tours Private Limited.
7. Before us, the ld. AR of the assessee has not advanced any argument on the ground nos. 1 to 3, therefore, the same are dismissed as not pressed.
8. As regards ground No. 4, raised as additional ground, the ld. AR submitted that different limbs to provisions of section 2(22)(e) of the Act which provides that any loan or advances made by a closely held company:
:- 7 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
(i) to a shareholder who is the beneficial owner of shares holding 10% or more equity shares in such closely held company; or
(ii) to any concern in which such shareholder is a member or partner and is beneficially entitled 20% or more of the income of the such concern; or
(iii) on behalf, or for the individual benefit, of such shareholder shall be deemed as dividend.
8.1 He submitted that even if for the sake of argument, share application money made by Caspian to recipient company is deemed to be loans and advances and thus to be deemed as dividend, in view of second limb to provisions of section 2(22)(e) of the Act, a vital question arises as in whose hands such loan and advances should be deemed as dividend. It may be noted that the aforesaid provision provides loans and advances should be regarded as deemed dividend, but, it does not provide in whose hands it should be regarded as dividend. Therefore, whether such loans and advances should be regarded as dividend in hands of the concern receiving the loans and advances or in the hands of such shareholder needs to be analyzed. In this regard, he referred to Circular No. 495 of 1987 dated 22 September 1987 issued by CBDT, wherein the CBDT has clarified that the dividend under second limb to provisions of section 2(22)( e) of the Act is to be taxed in hands of the concern receiving the loans and advances. Relevant extract of the Circular is produced below:
"10.3 The new provision would, therefore, be applicable in a case where a shareholder has 10 per cent or more of the equity capital. Further, deemed dividend would he taxed in the hands of a concern where all the following conditions are satisfied: (i) where the company makes the payment by way of loans or advances to a concern ; (ii) where a member or a partner of the concern holds 10 per cent of the voting power in the company; and (iii) where the member or partner of the concern is also beneficially entitled to 20 per cent of the income of such concern. With a view to avoid the hardship in cases where advances or loans have already been given, the new provisions have been made applicable only in :- 8 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy cases where loans or advances are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. "
8.2 Referring to the above Circular, the ld. AR submitted that the explanation in the aforesaid circular clearly provides that deemed dividend is to be taxed in the hands of the concern in receipt of loans and advances rather than in the hands of the shareholder, unless, the shareholder itself receives the loan. However, the lower authorities in the instant case, without considering the CBDT circular, has taxed share application money as deemed dividend under section 2(22)(e) of the Act in hand of the Appellant. If the action of the Ld. AO is accepted it will give arise to several administrative issues.
8.3 Further, the ld. AR relied on the decision of the Hon'ble Apex Court in the case of Gopal and Sons (HUF) -vs.- CIT [2017/ 77 taxmann.com 71 (SC) wherein it has been held that deemed dividend is taxable in the hands of the concern receiving the loan and advances. In the said case, HUF was holding beneficial interest in the shares of payer company whereas shares were registered in the name of Karta of the HUF. The HUF received certain loan and advances from the payer company. The Apex Court held that even if HUF is not a registered shareholder of payer company, as per provisions of section 2(22)(e) of the Act, once the payment is received by the HUF and the shareholder (i.e. Karta) is a member of the HUF and he also holds substantial interest (i.e. 20 percent or more) in the HUF, the loan! advance made by the payer company to the HUF shall constitute deemed dividend in the hands of HUF. The relevant paras of the said judgment is reproduced below:
16. In the instant case, the payment in question is made to the assessee which is a HUF. Shares are held by Shri. Gopal Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the member of HUF. He also has substantial interest in the assessee/HUF, being its Karta. It was not disputed that he was entitled to not less than 20% of the income of HUF. In view of the :- 9 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy aforesaid position. provisions of Section 2(22) (e) of the Act get attracted and it is not even necessary to determine as to whether HUF can. in law. be beneficial shareholder or registered shareholder in a Company.
17. It is also found as a fact, from the audited annual return of the Company filed with ROC that the money towards shareholding in the Company was given by the assessee/HUF. Though, the share certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but in the annual returns, it is the HUF which was shown as registered and beneficial shareholder. In any case, it cannot be doubted that it is the beneficial shareholder. Even if we presume that it is not a registered shareholder. as per the provisions of Section 2(22)(e) ofthe Act. once the payment is received by the HUF and shareholder (Mr. Sanei. karta. in this case) is a member of the said HUF and he has substantial interest in the HUF. the payment made to the HUF shall constitute deemed dividend within the meaning of clause (e) of Section 2(22) of the Act. This is the effect of Explanation 3 to the said Section. as noticed above. Therefore. it is no gainsaying that since HUF itself is not the registered shareholder. the provisions of deemed dividend are not attracted. For this reason, judgment in CP.
Sarathy Mudaliar, relied upon by the learned counsel for the appellant, will have no application. That was a judgment rendered in the context of Section 2(6-A)(e) of the Income Tax Act, 1922 wherein there was no provision like Explanation 3.
8.4 Further, ld. AR submitted that the charging provision does not specifically provides as to how the income should be computed in the hands of shareholders. As held in various judicial pronouncement that in the absence of computation mechanism the charging provisions fails. Given the same, in the absence of any prescribed mechanism for computation of dividend in the hands of shareholders, the charging provision fails and accordingly no dividend would be assessable in the hands of shareholders. In this connection, he relied on the following decisions:
(i) Hon'ble Apex Court in the case of CIT -vs. - B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC) held that under the scheme of Income-tax Act, 1961 charge of tax will not get attracted unless the case or transaction falls under the governance of the relevant computation provisions. The Apex court held as under:
:- 10 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
"The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging. section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section, there is no scheme of computation of for quantifying it. The legislative pattern discernible in the Act is against such conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head on income. "
9. As regards ground No. 5, the ld. AR submitted that the method of computing the deemed dividend taxable as directed by the CIT(A) to the tax officer is without any basis. He submitted that it is well settled law that the construction which advances the object of legislation should be made and not the one which defeats the same. Accordingly, in the absence of any computation mechanism provided, the amount should be apportioned in such a manner that do not lead to injustice to the any tax payer. Further, the formulae for allocation of loan as deemed dividend should be constant/same for any scenarios and cannot be altered to suit the intent of the revenue. He submitted that the amount of deemed dividend assessable in the hands of the Appellant should not be dependent on the shareholding of the other shareholders. The Ld. CIT (Appeals) held that where amount has been taxed either in the hands of the Appellant or spouse of the Appellant, the entire amount to be taxed in hands of the Appellant or Mr. Reddy, as the case may be. In this regard, the ld. AR relied on decision of Hon'ble Delhi Tribunal in the case of Puneet Bhagat -vs.- ITO [2016/157 lTD 353 (Delhi - Trib.) wherein it was held that deemed dividend would be assessable in the hands of shareholders to proportionate shareholding of the shareholders in the recipient entity.
:- 11 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
10. Ld. DR, on the other hand, submitted that the Circular No. 495, on which reliance placed by the assessee, was issued in 1987 and subsequent to the said circular, there are lot of decisions rendered by various courts interpreting the statute and held that deemed dividend should be taxed in the hands of shareholder and not in the hands of recipient/concern. The decision of Gopal and Sons (HUF) (supra) relied on by the assessee is related to HUF. She submitted that in the case of individual, HUF cannot be a shareholder, but, the Karta is a shareholder. The Hon'ble Supreme Court while rendering the decision in the said case, held that even if HUF is not a registered shareholder of payer company, as per the provisions of section 2(22)(e) of the Act, once the payment is received by the HUF and the shareholder (i.e. Kartha) is a member of the HUF and he also holds substantiate interest in the HUF, the loan/advance made by the payer company to the HUF shall constitute deemed dividend in the hands of HUF. She, therefore, submitted that the said case is not applicable to the facts of the case. She further argued that the special bench decision of Mumbai Tribunal in the case of ACIT Vs. Bhaumik Colour Pvt. Ltd., 313 ITR (AT) 146 is squarely applicable to the facts of the assessee's case. Accordingly, ld. DR contended that dividend income should be taxed in the hands of the assessee being a shareholder and not in the hands of concern.
11. Considered the rival submissions and perused the material facts on record as well as the case law cited at the bar. The AO held that the amount advanced by M/s Caspian Capital and Finance P. Ltd. to M/s Metro Architectures & Contractors Pvt. Ltd. and M/s Orbit Travels & Tours Pvt. Ltd., is assessable as deemed dividend in the hands of assessee for the AY 2007-08 in accordance with the provisions of section 2(22)(e) as the assessee is a shareholder having 10%, 20% & 40% respectively in the said companies. The CIT(A) upheld the action of the AO.
:- 12 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
11.1 The Hon'ble Delhi High Court in case of CIT Vs. Ankitech P. Ltd. (supra) while considering identical issue approved the decision of the ITAT, Mumbai Special Bench in case of Bhaumic Colours (P) Ltd., 313 ITR (AT) 146 and held as under:
"22. Insofar as the provisions of Section 2(22)(e) are concerned, we have already extracted this provision and taken note of the conditions/requisites which are to be established for making provision applicable. In Commissioner of Income Tax Vs. C.P. Sarathy Mudaliar[1972] 83 ITR 170, the Supreme Court had traced out the assessee of this provision in the following manner:
―Any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31.05.19987 by way of advance or loan. First limb
a) to a shareholder, being a person who is the beneficial of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, Second limb
b) or to my concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb
c) or any payment by any such company on behalf, or for the individual benefit, or any such shareholder, to the extent to which the company in either case possesses accumulated profits.
23. It is rightly pointed out by the Bombay High Court in Universal Medicare (P) Ltd.(supra)that Section 2(22)(e) of the Act is not artistically worded. Be as it may, we may reiterate that as per this provision, the following conditions are to be satisfied:
(1) The payer company must be a closely held company. (2) It applies to any sum paid by way of loan or advance during the year to the following persons:
(a) A shareholder holding at least 10 of voting power in the payer company.
(b) A company in which such shareholder has at least 20% of the voting power.
(c) A concern (other than company) in which such shareholder has at least 20% interest.
:- 13 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
(3) The payer company has accumulated profits on the date of any such payment and the payment is out of accumulated profits. (4) The payment of loan or advance is not in course of ordinary business activities.
24. The intention behind enacting provisions of Section 2(22)(e) is that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as M/s. ACE Tyres Limited, Bachupally, Ranga Reddy District dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of Section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.
25. Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to 'shareholder'. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend :- 14 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy at the hands of "deeming shareholder", then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective.
26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the Revenue to argue that if this position is taken, then the income "is not taxed at the hands of the recipient". Such an argument based on the scheme of the Act as projected by the learned counsels for the Revenue on the basis of Sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance.
27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under Section 2(22)(e) of the Act.
28. Insofar as reliance upon Circular No. 495 dated 22.09.1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P) Ltd. (supra)that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail.
29. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to 'magigical conclusion' as held in Andaleeb Sehgal (supra). The Revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction.
30. Before we part with, some comments are to be necessarily made by us. As pointed out above, it is not in dispute that the conditions stipulated in Section 2(22)(e) of the Act treating the loan and advance as deemed dividend are established in these cases. Therefore, it would always be open to the Revenue to take corrective measure by treating this dividend income at the hands of the shareholders and tax them accordingly. As otherwise, it :- 15 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy would amount to escapement of income at the hands of those shareholders."
11.2 The same view has also been expressed by the Hon'ble Delhi High Court again in case of CIT Vs. Navyug Promoters P. Ltd. (203 Taxman 618) and Hon'ble Bombay High Court in case of CIT Vs. Universal Medicare (P) Ltd., (324 ITR 263).
11.3 The IT AT, Hyderabad Bench in case of MARC Manufacturers Pvt. Ltd. Vs. ACIT in ITA No. 555/Hyd/2008 dt. 31/08/2009 while considering identical issue of advancement of loan to one company, which is not a shareholder of the lender company following the. decision ofM/s. ACE Tyres Limited, Bachupally, Ranga Reddy Districl ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) and other decisions held as under:
"5. It can be seen from the circular that the provisions of amended section 2(22)(e) are to be applied only to the payments made to the shareholders and not to any other person or concern other than the shareholders. The Allahabad High Court in the case of CIT vs. H. K. Mittal reported in 219 ITR 420 held that the chief ingredient of dividend as defined in sub clause (e) of clause (22) of section 2 of the I T Act is that the recipient should a shareholder on the day the loan was advanced. If that fact is not established, there cannot be a deemed dividend. Therefore, the provisions of sec. 2(22)(e) cannot be applied to MARC as it is not a shareholder in MTAR Technologies Pvt. Ltd. (Hereinafter called as MTAR). In this regard, the assessee relies on the decision of the ITAT Mumbai Bench "G" in the case of Seamist Properties Pvt. Ltd. vs. ITO reported in (2005) 1 SOT page 142. The assessee further submits that the provisions of sec. 2(22)( e) mention as under:
"Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) (made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as :- 16 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits"
11.4 The ITAT Mumbai Special Bench in case of Bhaumik Colour P. Ltd. (supra) held as under:
"24. The expression "shareholder being a person who is the beneficial owner of shares" referred to in the first limb of s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial then the provision of s. 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the first limb of provisions of s. 2(22)(e) will not apply.
25. The new category of payment which was considered as dividend introduced by the Finance Act, 1987 w.e.f. 1st April, 1988 by the second limb of s. 2(22)(e) is payment "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest". It is this category of payment with which we are concerned in this reference.
26. The following conditions are required to be satisfied for application of the above category of payment to be regarded as dividend. They are :
(a) There must be a payment to a concern by a company.
(b) A person must be a shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression "such shareholder" found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of s. 2(22)(e) viz., a registered and a beneficial holder of shares holding 10 per cent voting power.
The Hon'ble Rajasthan High Court in the case of Union of India vs. Wazir Singh AIR 1980 Raj 252, while dealing with an expression "no such application" in the context of r. 97 of the Rajasthan High Court Rules, 1952 has held as follows :
"Generally the word 'such' refers only to previously indicated, characterized or specified. 'Such' is an adjective meaning, the one previously indicated or refers only to something which has been said before."
The Hon'ble Allahabad High Court in the case of Mohan Lal & Anr. vs. Grain Chambers Ltd. AIR 1959 All 279 has held as follows :
"In fact, it appears to us that the word 'such' is used before a noun in a latter part of a sentence, the proper construction in the English language is to hold that the same noun is being used after the word 'such' with all its characteristics which might have been indicated earlier in the same sentence."
:- 17 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
(c) The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty per cent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power.
(d) If the above conditions are satisfied then the payment by the company to the concern will be dividend.
27. In the case of the assessee it is seen that conditions (b) and (c) are not satisfied inasmuch as NNT held shares in UPPL and BCPL only as a legal and registered owner but not as a beneficial owner. In the case of the assessee it is seen that the three trustees of NNT held shares in UPPL and BCPL only as a legal and registered owner. They held shares for and on behalf of 5 beneficiaries of the trust who are different individuals. They were therefore not beneficial owners of the shares. Trust ownership is a peculiar instance of duplicate ownership. Trust property is, in fact, owned by two persons simultaneously in the sense that one is under an obligation to use the property for the benefit of the other. The ownership of the trustee called trust ownership is nominal rather than real. The beneficiary interest is called the beneficial interest. The trustee is to administer the property of another person but the ownership right in the trustee is to be used only on behalf of the real owner. As between trustee and third party ownership conferred on the trustee fictitiously by law prevails, i.e., the trustee is clothed with the rights of the beneficiary and is so enabled to personate or represent him in dealings with the world at large. The main purpose of trusteeship is to protect the rights and interest of person who for any reason are unable effectively to protect them for themselves. Such protection is required for four classes of people, (a) unborn persons; (b) infants, lunatics, or other disqualified persons; (c) a large number of persons who are interested in common; and (d) persons having conflicting interest in the same property, i.e., an owner and an encumbrancer or different kinds of encumbrances. Therefore, the first requirement of holding of shares both as a legal registered owner and beneficial owner of such shares is not satisfied in the case of the assessee. Therefore, provisions of s. 2(22)(e) would not be applicable at all to the case of the assessee.
28. The answer to the second question referred to the Special Bench is that the expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply.
29. In view of the fact that the assessee was not holding beneficial interest in shares of BPCL and UPPL, there is no requirement of answering the first question that arises for consideration in the case of the assessee viz., as to whether deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender ? However, in the case of the intervener viz., Asstt. CIT vs. Weaveland, ITA No. 5036/Del/2008 (supra) this question needs to be answered. The facts in the :- 18 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy case of the intervener have already been narrated earlier and are not being repeated here.
30. At the outset it has to be mentioned that provisions of s. 2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act, 1987 w.e.f 1st April, 1988 viz., payment by a company "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" do not say, as to in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder". We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
31. The above provisions were subject-matter of consideration before the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop (supra). The facts of the case before the Hon'ble Court were as follows. The assessee was one M/s Hotel Hilltop a partnership firm. This firm received an advance of Rs. 10 lakhs from a company M/s Hilltop Palace Hotels (P) Ltd. The shareholding pattern of M/s Hilltop Palace Hotels (P) Ltd., was as follows :
1. Shri Roop Kumar 23.33% Khurana
2. Smt. Saroj 4.67% Khurana
3. Vikas Khurana 22%
4. Deshbandhu 25% Khurana
5. Shri Rajiv 25% Khurana The constitution of the firm Hotel Hilltop was as follows :
1. Shri Roop Kumar 45% Khurana
2. Shri 55% Deshbandhu Khurana The AO assessed the sum of Rs. 10 lakhs as deemed dividend under s.
2(22)(e) of the Act in the hands of the firm because the two partners of M/s Hotel Hilltop were holding shares by which they had 10 per cent voting power in M/s Hilltop Palace Hotel (P) Ltd. They were also entitled to 20 per cent of the income of the firm M/s Hotel Hilltop. Therefore the loan by M/s Hilltop Palace Hotels (P) Ltd. to the firm M/s Hotel Hilltop was treated as deemed dividend in the hands of M/s Hotel Hilltop, the firm under the second limb of s. 2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the :- 19 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue's appeal before the Hon'ble High Court, the following question of law was framed for consideration :
"Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs. 10 lakhs as deemed dividend under s. 2(22)(e) of the IT Act ?"
The Hon'ble Court held as follows :
"The important aspect, being the requirement of s. 2(22)(e) is, that 'the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder .......'. Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder. Obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression 'deemed dividend'. Obviously, income from dividend is taxable as income from the other sources under s. 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons; being shareholder. Of course, the two individuals being R and D, are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firms, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of s. 2(22)(e) is not shown to exist. The liability of tax, as deemed dividend, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm."
32. The aforesaid decision of the Hon'ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No. 2 which has been referred to the Special Bench by holding that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. The argument of the learned Departmental Representative that the Hon'ble Rajasthan High Court did not deal with the second limb of s. 2(22)(e) of the Act is not correct.
33. We may also touch upon certain other aspects of the issue in the light of the submissions made before us. The Tribunal in the case of Nikko Technologies (I) (P) Ltd. (supra), while holding that the payment made by a company even to a non-shareholder can be brought to tax in the hands of the non-shareholder has made the following observations :
"12 ........... Sec. 2(22)(e) only specifies the circumstances under which a payment by way of loan/advance is to be treated as deemed dividend. Once it is determined that any payment by way of loan/advance falls within the ambit :- 20 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy of s. 2(22)(e), then, it has to be treated as dividend even though such payment in the ordinary circumstances may not be considered as dividend. At this point of time, role of s. 2(22)(e) ends. It nowhere provides as to who is to be taxed in respect of such income. It is to be borne in mind that the tax can only be assessed in the hands of right person as held by the apex Court in the case of ITO vs. Ch. Atchaiah (1996) 130 CTR (SC) 404 : (1996) 218 ITR 239 (SC), at pp. 243-244.
13. In order to find out the right person, one has to examine the charging provisions of the Act. Secs. 4 and 5 of the Act are the charging provisions......."
Thereafter, the Tribunal has referred to the provisions of s. 5(1) of the Act and has concluded that income accrues to the person who is the recipient of the payment from the company. The Tribunal has thereafter referred to Circular No. 495, dt. 22nd Sept., 1987 of the CBDT wherein it has been opined that deemed dividend would be taxed in the hands of a concern (non-shareholder) also if the conditions mentioned in the section are satisfied.
34. We are of the view that the provisions of s. 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of s. 2(22)(e) of the Act.
35. The intention behind enacting provisions of s. 2(22)(e) are that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of s. 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
36. The basis of bringing in the amendment to s. 2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1st April, 1988 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can draw the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance :- 21 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy received by a concern is not in the nature of income. In other words, there is a deemed accrual of income even under s. 5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non-shareholder (concern). Sec. 5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern.
37. The definition of dividend under s. 2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term "dividend" according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word "dividend" is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as dividend in the hands of a shareholder the ordinary and natural meaning of the word "dividend" is altered. To this extent the definition of the term "dividend" can be said to operate. If the definition of "dividend" is extended to a loan or advance to a non-shareholder, the ordinary and natural meaning of the word "dividend" is taken away. In the light of the intention behind the provisions of s. 2(22)(e) and in the absence of indication in s. 2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a non-shareholder cannot be taxed as deemed dividend in the hands of a non-shareholder.
38. The basic characteristic of dividend as held by the apex Court in the case of Kantilal Manilal vs. CIT (1961) 41 ITR 275 (SC) is a share of profits of the company given to its shareholders. Further, s. 206 of the Companies Act, 1956 prohibits payment of dividend to any person other than the registered shareholder. If one were to break up the natural meaning, the following two components emerge (a) dividend is a share of profits of the company; (b) paid to its shareholders. Sec. 2(22) of the Act artificially extends the scope of dividend from being more than only a distribution of profits to cover certain other types of disbursements such as loans paid etc. (the first ingredient mentioned above). It does not however alter the second component of its natural meaning viz. paid to its shareholder. In other words, all that s. 2(22) seeks to do is to expand the various types of payments that may be regarded as dividend. The apex Court while considering what can come within the artificial definition of dividend under s. 2(22) in the case of CIT vs. Nalin Behari Lall Singha (1969) 74 ITR 849 (SC), described the scope of the definition of dividend thus--
"The definition is, it is true, an inclusive definition and a receipt by a shareholder which does not fall within the definition may possibly be regarded as dividend within the meaning of the Act unless the context negatives that view."
The contention of the Departmental Representative that provisions of s. 8(a) of the Act create a fiction by which even payments to non-shareholders can be construed as dividend cannot be accepted. Those provisions merely fix the year in which dividend has to be taxed. It is therefore clear that the shareholder alone can, if at all, be subjected to tax for having earned dividend.
:- 22 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
39. In the decision of the Tribunal in the case of Nikko Technologies (I) (P) Ltd. (supra), reliance has been placed on Circular No. 495, dt. 22nd Sept., 1987 which states as follows :
"Further deemed dividend would be taxable in the hands of the concern, where all the following conditions are satisfied................."
We are of the view that circulars of CBDT to the extent that they do not tone down the rigor of the provisions of the Act in the sense to the extent they are not benevolent are not binding.
40. Apart from the above, it is also noticed that s. 2(22)(e)(iii) provides relief to a shareholder as follows :
"Dividend does not include :
(i) to (ii)..........
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e) to the extent to which it is so set off."
In the event of the payment of loan or advance by a company to a concern being treated as dividend and taxed in the hands of the concern then the benefit of set off cannot be allowed to the concern, because the concern can never receive dividend from the company which is only paid to the shareholder, who has substantial interest in the concern. The above provisions also therefore contemplate deemed dividend being taxed in the hands of a shareholder only. For the reasons stated above, we are of the view that the law laid down in the case of Nikko Technologies (I) (P) Ltd. (supra) is not correct. We therefore hold that deemed dividend under s. 2(22)(e) of the IT Act, 1961 can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person.
41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows :
On the first question : Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.
On the second question : The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply."
11.5 The intention of the legislature is clarified in circular issued by the CBDT as at the time of amendment of clause (e) of sub section :- 23 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy (22) of sec. 2 is further fortified by the fact that for deduction of tax at source. Sec. 194 provide that such deduction of tax has to be made in the case of the payments of the nature mentioned in clauses (a), (b),
(c), (d) and (e) of sub section (22) of Section 2 only in a case where such payments were made to a shareholder. Section 199 also indicates that adjustment of TDS would be provided in the assessment of shareholder only. The very fact that the provision for deduction of tax at source and adjustment of tax is only in respect of the payments to the' shareholder would clearly indicate that even after the amendment, the effect of clause (e) of sub section (22) of Sec. 2 would apply only when the payment is made to shareholder. Wherever, the tax is to be deducted at source from a dividend or deemed dividend and the consequential effect of giving effect to such deduction of tax at source, etc., reference was made only to the payments to the shareholder. This would indicate clearly that clause (e) would apply only in case of payments to the shareholder and not to others.
11.6 In view of the foregoing discussion and following the special bench decision of Mumbai Tribunal in the case of ACIT Vs. Bhaumic Colour Pvt. Ltd. as well as the decision of the Hon'ble Delhi High court in the case of CIT Vs. Ankitech P. Ltd., we hold that the dividend income is taxable in the hands of shareholders and not in the hands of the concern. Accordingly, we dismiss the assessee's ground on this issue.
11.7 As regards the contention of the AR of the assessee that the CIT(A) erred in upholding the action of the AO in not considering the CBDT Circular No. 495 of 1987, dated 22 nd September 1987 which was binding on the AO, as raised in additional ground No. 4, we are of the view that the assessee is a share holder in the payer company i.e. M/s Caspian capital and Finance Pvt. Ltd. and also a shareholder in the companies M/s Metro Architectures & Contractors Pvt. Ltd., and M/s Orbit Travels & Tours Pvt. Ltd., to whom the payer company advanced :- 24 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy an amount of Rs. 36.10 lakhs and Rs. 15.00 lakhs respectively. The CBDT issued the circular in 1987 and subsequently, there are number of decisions rendered by various courts interpreting the statute and held that deemed dividend should be taxed in the hands of the shareholder and not in the hands of recipient concern. The Circular No. 495 is not binding on the courts and lower courts have to follow the judgements of higher judiciary as matter of judicial discipline. However, Ld. AR argued that the said Circular is a beneficial circular, but, as observed from the Circular, it is not a beneficial or benevolent circular, but, it is only a clarificatory in nature. Since the issue has been settled by Hon'ble special bench and approved by Hon'ble Delhi High court, the judgements of courts are binding and as held by the Hon'ble Delhi High Court, once we find that the loan or advance is not taxable in the hands of such concern and should be taxed in the hands of shareholder and that is a correct legal position according to us, such a circular would be of no use. Further, Circulars are not binding on the courts. Accordingly, we dismiss this ground of assessee.
11.8 As regards the application of the decision of Hon'ble Supreme Court in the case of Gopal Das and Sons (HUF), 77 Taxmann.com 71 (SC), ld. DR argued that the said case is related to HUF. HUF cannot be a registered shareholder, funds are flown from HUF and HUF had beneficial interest and Karta is representing the HUF. The Hon'ble Supreme Court in the said case held that even HUF is not a registered shareholder, loan advanced to HUF is taxable because of the reason explained above. The decision of the Hon'ble Apex Court is specific on the facts of this case and applicable to HUF, but, has not laid down any law. Therefore, reliance placed by the ld. AR on the said case is distinguishable on facts and not applicable to the facts of the case. Hence, on this issue, contentions of the Ld. A.R is not tenable and rejected.
:- 25 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014
Smt. G. Indira Krishna Reddy
and Shri G.V. Krishna Reddy
11.9 As regards the contention of the ld. AR in additional ground No. 5 that the CIT(A) erred in not restricting the addition u/s 2(22(e) proportionate to the extent of assessee's shareholding in recipient company, the CIT(A) directed the AO as under:
"• Where the amount has been taxed in the hands of Appellant and spouse of the Appellant i.e. Mr. Reddy - In the hands of Appellant and spouse of the Appellant i.e. Mr. Reddy as per the shareholding ratio of Appellant and Mr. Reddy in the payer company i.e. Caspian;
• In other scenario i.e. where amount has been taxed either in the hands of the Appellant or spouse of the Appellant, no such apportionment should be made i.e. the entire amount to be taxed in hands of the Appellant or Mr. Reddy, as the case may be."
11.10 Ld. DR argued that the loans advanced to the recipient companies are required to be taxed in proportion to the share holding of the assessee's in the recipient company. The intention of taxation of deemed dividend is clearly explained by the Special Bench of ITAT Mumbai in the case of Bhaumic Colours (supra), the observations of which were extracted in above paragraphs. The entire advances or loans given to the concerns of the share holders having substantial interest required to be to the extent of accumulated profits. Therefore, there is no failure of computation mechanism in taxing the deemed dividend as the entire advances are to be taxed. The Hon'ble Supreme Court in the case B.C. Srinivasa Shetty, [1981] 5 Taxman 1 (SC) on the issue of failure of computation mechanism, observed on taxing of goodwill under capital assets for which no cost of acquisition was available. For computing capital gains as per section 45, the cost of acquisition along with indexation required to be reduced and in the absence of cost of the asset mode of computation was not explained and hence the computation mechanism fails. Therefore, the case law relied up on by the assessee is not applicable to the case of the assessee. The dividend is always distributed to the shareholders of the company and the entire advances or loans given to such concerns of :- 26 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy shareholders with substantial interest should be brought to tax to prevent unauthorized distribution of dividend to the controlling shareholders in the guise of loans and advances. . In the asssessee's case, both the assessee and her husband are having more than 10% share holding in M/s Caspian Capital and Finance Pvt. Ltd., and also share holders in the companies borrowing companies having more than share holding of 20%. There is no other shareholder who is having substantial interest in both the payer company and the recipient companies have been brought on record before us by the ld. AR. Therefore, we hold that the advances given to the recipient companies are required to be taxed in the both the hands of the assessee and her husband. We are unable to accept the contention of AR to follow decision of Puneet Bhagat Vs. ITO, [2016] 157 ITD 353, wherein honourable Delhi Tribunal held that deemed dividend would be assessable in the hands of the shareholders to the proportionate share holding of the shareholders in the recipient entity. The dividend/deemed dividend always payable to the shareholders of the Payer company. Non share holders/deemed share holders have no right in the dividend. Hence, the question of taxing the deemed dividend as per the proportionate shareholding in borrowing company does not arise. This issue has been considered by the ITAT Mumbai Bench in the case of ITO Vs. Sahir Sami Khatib, 57 Taxmann.com 13 (Mum. Trib.) wherein the Tribunal observed as under:
In the case in hand the advance/loan has been given by MLPL to Oryx which is not a shareholder of the lending company but the assessee is holding 15 per cent of the voting power in the lending company and 45 per cent of the shares in the borrowing company. Therefore, the payment in question being loan has to be examined in the context of second situation, wherein, the payment is given to any concern in which the shareholder is a member or a partner and has a substantial interest. There is no quarrel on the point that the assessee is having more than 10 per cent of the voting rights in the lending company. Therefore, to bring the payment in question under the expression of 'dividend' as per clause (e) of section 2(22), the condition that the assessee is having a substantial interest in the borrowing company has to be satisfied. The term "concern" has been defined in Explanation 3 to section 2(22)(e) which includes HUF or firm or an association of person or a body of individual or a company. Therefore, Oryx falls under the ambit of term "concern" as stipulated :- 27 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy under clause (e) of section 2(22). The substantial interest in a company has not been defined under section 2(22)(e); however, this term has been defined in section 2(32) and in the Explanation to section 40A(2) whereby a person shall be deemed to have substantial interest in a business or a profession if the business and profession is carried on by a company, and such person is, at any time during the previous year, is the beneficial owner of shares carrying not less than 20 per cent of the voting powers. In the case in hand, the assessee is having 45 per cent of shareholding of the borrowing company. Therefore, by applying the parameters as per section 2(32) and Explanation to section 40A(2) as well as any other parameters in general, the assessee is having substantial interest in the borrowing company, i.e., Oryx. [Para 7-8] Since the assessee is a shareholder of the lending company and also having a substantial interest in the borrowing company, the conditions as prescribed under section 2(22)(e) are satisfied to include the payment in question within the ambit of 'dividend' to be taxed in the hands of the assessee. The contention of assessee that only a proportionate amount of loan received by the borrowing company can be assessed as dividend in the hands of the assessee to the extent of his shareholding in the borrowing company cannot be agreed with due to the simple reason that as per provisions of section 2(22)(e) the two conditions are required to be fulfilled, viz., the person having not less than 10 per cent of voting power in the lending company and a substantial interest in the borrowing concern. Both these conditions are satisfied. Therefore, in the absence of any such provision of proportionate addition nothing can be read in between the unambiguous language of the provision of section 2(22)(e). Further, it is not the case of more than one shareholder complying the conditions of having not less than 10 per cent voting power in the lending company and also having substantial interest in the borrowing company. From perusal of shareholding pattern, it was found that only the assessee is holding 15 per cent of the voting power in the lending company and 45 per cent of voting power in the borrowing company and no other person/share holder is common other than the assessee. Therefore, there is no question of any proportionate addition when the assessee is the only shareholder who fulfils the condition prescribed under section 2(22)(e). [Para 9] Following the ratio laid down in the said case, we are unable accept the contention of the AR that the deemed dividend should be assessed in the hands of the assessee proportionately to the extent of assessee's shareholding in the recipient company. Therefore, we dismiss the ground raised by the assessee on this issue.
12. As the facts and grounds in appeal Nos. 1496, 1497, 1498, 1499 & 1500/Hyd/2014 are materially identical to that of ITA No. 1495/Hyd/2014 for AY 2007-08 in the case of Smt. G. Indira Krishna :- 28 -: I.T.A. Nos. 1495 to 1500 /Hyd/2014 Smt. G. Indira Krishna Reddy and Shri G.V. Krishna Reddy Reddy, following the conclusions drawn therein, we dismiss the grounds raised in the said appeals.
13. In the result, all the appeals under consideration are dismissed.
Pronounced in the open court on 24 th May, 2017.
Sd/- Sd/-
(D. MANMOHAN) (D.S. SUNDER SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated:24 th May , 2017.
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1 Smt. Indira Krishna Reddy, 6-3-250, Road No. 1, Banjara Hills,
Hyderabad - 500 034.
2 Shri G. V. Krishna Reddy, 6-3-250, Road No. 1, Banjara Hills,
Hyderabad - 500 034.
2 DCIT, Circle - 2(2), Hyderabad.
3 CIT (A)-III, Hyderabad.
4 CIT - II, Hyderabad.
5 The DR, ITAT Hyderabad
6 Guard File